Foreign equities under pressure: what should investors do?

Indian equity investors, who have traditionally concentrated their investments in domestic markets, have increasingly ventured into overseas equities over the past two years, particularly in the past year. Remittances for overseas equity and debt investments more than doubled year-on-year to $321.5 million from $152.2 million.

Until recently, even investors who allocated money overseas largely restricted themselves to US stocks. However, the triple-digit returns delivered by South Korean and Taiwanese indices in 2025, driven by a spectacular rally in artificial intelligence (AI) and semiconductor stocks, brought these markets into sharper focus among Indian investors, particularly as domestic markets have been going through a rough patch for nearly two years.

The rally continued into 2026. In the year up to June, South Korea’s Kospi delivered returns of 83%, Taiwan’s market returned 51%, and the Nasdaq 100 gained 20%.

However, since July, AI and semiconductor stocks have witnessed sell-offs, prompting investors to question whether they should continue holding foreign equities. The familiar tendency to react to recent market performance has resurfaced.

Diversification case

The primary objective of investing in foreign equities should be geographical diversification. Different countries offer exposure to varying economic cycles, industries, innovation ecosystems and growth opportunities. Investing globally also allows Indian investors to participate in emerging themes such as AI, electric vehicles, the energy transition and electronics, where certain overseas markets have a competitive advantage and India lags behind.

India accounts for only around 3% of global equity markets. Restricting investments entirely to domestic equities means missing exposure to the remaining 97% of the global opportunity set. This does not mean investors should allocate 97% of their portfolios to overseas equities, but it highlights the importance of looking beyond domestic markets.

Global diversification can also help reduce excessive dependence on the fortunes of a single economy. India's long-term growth prospects remain attractive, but domestic equities can experience extended periods of underperformance or heightened volatility. This can be particularly pronounced during geopolitical disruptions such as the current one, which hurt India relatively more because of its heavy dependence on imported oil.

Past returns

The sharp rally in global markets during 2025 may have encouraged investors to expect similar performance in subsequent years. However, assuming that markets which have delivered exceptional returns will continue to outperform indefinitely is neither rational nor realistic.

Markets move in cycles, and leadership constantly changes. Diversification rests on the principle that different asset classes, geographies and sectors perform differently across market cycles. No single market consistently outperforms every other market. Therefore, past returns should not be the sole criterion for choosing a country, index or asset class.

Stay invested

Exiting overseas investments merely because they are undergoing a correction could defeat the purpose of diversification. Investors who exit during downturns risk turning a long-term allocation decision into short-term performance chasing.

Foreign equities, like domestic equities, are subject to market volatility, currency fluctuations and geopolitical risks. The appropriate response to a correction should depend on whether the original investment rationale has changed, the portfolio's overall allocation and the investor's time horizon, rather than on the market decline alone.

Periodic portfolio reviews and rebalancing can help investors maintain their intended asset allocation without making reactive decisions based on short-term market movements. The sharp rally in global equities over the past two years also warrants a review, as the appreciation in asset values may have altered the intended allocation.

Concentration risks

While geographical diversification is important, investors must also examine the underlying composition of the markets they invest in. Indices in Taiwan and South Korea, for instance, are significantly influenced by a handful of large technology and semiconductor companies. Their performance can therefore be disproportionately affected by developments in the AI ecosystem.

Investors should consider broad-based indices such as the S&P 500, which provide exposure to companies across multiple sectors, as well as actively managed overseas equity portfolios that diversify across geographies, sectors and investment themes. This can help reduce dependence on a single industry or a small group of stocks.

Strategic allocation

Foreign equities should form part of a well-considered asset allocation strategy rather than being treated as a short-term bet on the next outperforming market.

Investors with moderate or aggressive risk profiles may consider allocating 20-30% of their equity portfolio to global equities. The appropriate allocation depends on an investor's financial goals, investment horizon, risk appetite and existing portfolio.

(The author is director, Dhanavruksha Financial Services Pvt. Ltd.)